MREITs likely unaffected by US’ possible interest rate hike
KUCHING: The concerns of the tightening of US interest rates is not expected to have a dampening impact on Malaysian real estate investment trusts ( REITs) ( MREITs), in Affin Hwang Investment Bank Bhd’s (Affin Hwang) view.
According to Affin Hwang, the 10-year Malaysian Government Securities ( MGS) yield curve has steepened by 48 basis points (4.14 per cent as at November 14, 2016) since Donald Trump’s presidential victory, as a result of funds outflow in the MGS market.
“Nonetheless, based on our house view, even if there is a potential tightening in the US Fed funds rate, this is unlikely to affect our domestic interest rates (current Overnight Policy Rate at three per cent) as Bank Negara remains cautious on the downside risks to our economy arising from external factors (weak commodity prices and policy shifts in major economies),” the research firm said in its sector update.
Hence, Affin Hwang believed that the recent price volatility in the MREITs sector was unjustifiable, should it be based on conventional wisdom of REIT prices and interest rates (where present value of future income distribution is reduced by higher rates) especially with little impact on REIT earnings.
The research firm also believed that the steepened 10-year MGS yield curve may normalise once funds outflow stabilises.
Affin Hwang highlighted that most MREITs have limited exposure to short-term interest rates, as most rely more on equity capital and have locked-in fixed rates on long-term debt.
The research firm noted that this is reinforced by a relatively modest level of gearing among the MREITs (on average at 27 per cent) while interest coverage ratio range from 1.3-fold (YTLREIT) to a
Nonetheless, based on our house view, even if there is a potential tightening in the US Fed funds rate, this is unlikely to affect our domestic interest rates (current Overnight Policy Rate at three per cent) as Bank Negara remains cautious on the downside risks to our economy arising from external factors (weak commodity prices and policy shifts in major economies). Affin Hwang
high of 8.2-fold for KLCCPSG (excluding outlier Tower REIT).
“Meanwhile, most MREITs are backed by a ringgit- denominated debt as most assets are domesticbased, hence a weaker ringgit has minimal impact on the REIT.
“Only YTLREIT has an Australian dollar- denominated term loan which was raised to finance its Australian-based Marriott hotels,” the research firm said.
As such, Affin Hwang maintained its ‘overweight’ on the MREITs in 2017 as the research firm continued to see strong investor appetite for yields due to the low/negative interest rates policy at some developed nations while uncertainties of a rebound in economic activities have also driven investors to safe haven investments.
Meanwhile, the research firm believed that the retail MREITs under our universe ( IGB REIT and Pavilion REIT) will continue to see positive rental reversion in upcoming renewals, though likely to be in mid to high single- digit (compared to mid-teens reversion in the past).
“The resilience of the REITs’ tenancy/lease structure remains the key factor for consideration as the sector is plagued by threats of incoming supply in the office, retail and hotel market,” it said.